Do Entrepreneurs Make Predictable Mistakes?

We assess the argument that corporate acquisitions are driven mainly by agency
considerations. This argument holds that certain kinds of mergers—mergers between firms in
unrelated industries, mergers between firms with large differences in price-earnings ratios, and
mergers financed with stock swaps, for example—will consistently fail, eventually being reversed
in a divestiture. Appealing to Mises’s theory of entrepreneurship, we argue instead that
divestitures of previously acquired assets usually result from experimentation and learning,
healthy attributes of a market economy. We then describe empirical evidence that the long-term
success or failure of corporate acquisitions cannot, in general, be predicted by measures of
agency conflicts. We also show that mistaken acquisitions are more likely under certain circumstances,
namely during periods of intense, industry-specific regulatory activity. This is consistent
with the view, expressed repeatedly in the Austrian literature, that entrepreneurial error is associated
with government intervention—in particular, with government ownership of property and
interference with the price system.
JEL Classifications: D84, G34, G38
Key words: acquisitions, divestitures, entrepreneurship, market process, experimentation